Chapter 2 : Professional Ethics

1 ACCA Code of Ethics & Conduct

An accountant serves public interest by adhering to an expected level of professional

behaviour.

This expectation is made clear in the ACCA Code of Ethics & Conduct.
(The ACCA Code in turn is based on the International Ethics Standards Board for
Accountants – The IESBA Code)
INTRODUCTION TO PRINCIPLE AND THREAT

ACCA follows a principles-based approach. It is important to put principles into context.

− The professional accountant must follow the RULES in the ACCA Code.
− IF the ethical dilemma is not covered by ACCA’s rules, you must consider the
FUNDAMENTAL PRINCIPLES.
2 Fundamental Principles

Professional behaviour
The professional accountant to:
(i) Behave in a manner that is consistent with the profession’s responsibility act in the
public interest.
(ii) Avoid any conduct that the professional accountant knows or should know might
discredit the profession; and
(iii) Comply with relevant laws and regulations

Integrity
The professional accountant to be straightforward & honest (no lies) in all professional &
business relationships.
Integrity also implies fair dealing and truthfulness. (making known the full truth of the matter)
Integrity also includes having the determination to act appropriately when confronting
dilemmas or difficult situations. This would involve, for example:
 Standing one’s ground when facing pressure to do otherwise during the course of
performing professional activities; or
 Challenging others as and when appropriate,
even when doing so creates potential adverse personal or organizational consequences

Professional Competence & due care

The professional accountant to ATTAIN & MAINTAIN professional knowledge and skill at a
level required to ensure that a client or employer receives competent professional service
based on current developments in practice, legislation & techniques AND act diligently & in
accordance with applicable technical & professional standards

Confidentiality
The professional accountant to respect the confidentiality of information acquired as a
result of professional and business relationships &, therefore, NOT disclose any such
information to third parties without proper and specific authority.

Objectivity
The professional accountant to exercise professional or business judgments without being
compromised by:
(i) Bias
(ii) Conflict of interest; or
(iii) Undue influence of or undue reliance on, individuals, organizations, technology, or
other factors.
3 Threats
Familiarity threat
The threat that due to a long or close relationship with a client or employer,
a professional accountant:
− will be too sympathetic to their interests or
− willbe too accepting of their work ( resulting in a serious risk of loss
of professional skepticism )
The threat that after receiving a valuable gift / favor from client or client
staff, a professional accountant may feel under pressure to return the
favor by turning a blind eye to their wrongful actions.

Advocacy threat
The threat that a professional accountant will promote a client’s or
employer’s position to the point that his objectivity is compromised

Self-Review threat
The threat that a professional accountant is unlikely to be critical of
his own work or the work of a colleague.

Self-Interest threat
The threat that a financial or other interest will inappropriately influence
the professional accountant’s judgement or behavior to protect his own
interest

Intimidation threat
The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts
to exercise undue influence over the professional accountant.
4 The independence of the external auditor

INTEGRITY able to maintain integrity

OBJECTIVITY
- PROF JUDGEMENT
able to make objective judgements
free from external influence or bias

Exercise appropriate
PROFESSIONAL SKEPTICISM

For an audit report to be of value, the auditor must…

BE INDEPENDENT Independence of mind

Means having a state of mind
that permits the auditor
to give an opinion without being affected by influences
that compromise professional judgement,
thereby allowing an individual to act with integrity and
exercise objectivity and professional skepticism

BE SEEN TO BE
INDEPENDENT Independence in appearance

Avoiding circumstances
that are so significant
that may cause the public

to conclude that
the firm's integrity & objectivity
has been compromised

WHY is it necessary for the auditor to :

1. So that the auditor will be free to :

- Comply with ISAs & IFRSs users will be able to rely on the audited F/S
- Exercise professional skepticism
- Collect sufficient appropriate audit evidence

2. So that the auditor’s opinion will not be influenced by 3rd parties & will be objective
3. Because the Companies’ Act & the ACCA Code requires it so
4. So that the auditor does not collude with directors & cover up poor results
 5. So that the credibility of the audited financial statements can be maintained

5 Safeguards
Safeguards created by the PROFESSION, LEGISLATION OR REGULATION include,
but are not restricted to:

- Educational, training & experience requirements for entry into the profession
- Continuing Professional Development requirements
- Professional standards ( such as the ISAs, IESBA Code )
- Professional or regulatory monitoring and disciplinary procedures
- Corporate governance regulations ( AC to oversee the independence & work
of external auditor)

Safeguards WITHIN THE ASSURANCE CLIENT include:

- when the client’s management appoints the auditor,
people other than management ratifying or approving the appointment
- the client having competent employees to make managerial decisions;
- policies and procedures emphasizing the client’s commitment to fair
financial reporting;
- internal procedures ensuring objective choices in commissioning non-
audit work; and
- Strong corporate governance, including an effective Audit Committee
- Corporate governance regulations ( AC to oversee the independence &
work of external auditor)
FIRM-WIDE safeguards in the work environment include may include:

- Policies & procedures to comply with requirements of ISQM 1 [Quality

Management for Firms that
Perform Audits or Reviews of Financial Statements, or Other Assurance or
Related Services Engagements] & ISQM 2 [Engagement Quality Reviews]

- Operation of disciplinary mechanism to promote compliance with policies and

procedures

- Arrangements to ensure physical separation of staff when auditing clients

whose interests may be in conflict ( Chinese Walls)

- Using different departments (different partners & teams) for the provision of
Non Audit Services to an assurance client

- Open-door policy to enable staff able to communicate to partners any issue of

independence that concerns them.
ENGAGEMENT SPECIFIC safeguards in the work environment may include:
− Rotation of senior personnel in the assurance team.
− Removing an individual from the audit team,
when that individual’s financial interests or relationships create a threat to
independence.
− Members of the audit team prohibited from making management decisions for
the audit client.
− Discussing ethical issues with Those Charged With Governance of the client.
− Involving an additional accountant to review the work done or otherwise advise
as necessary.
Ethical questions
1)Threat (Identified + Explain)
2)Rules/safeguard
6 Specific rules from ACCA Rulebook
Fees
Lowballing
Quoting low & insufficient fee
in order to win the audit
tender
Aim to get lucrative non-
audit work
Total fees from client or group
of client represent large
proportion of firms total fees
Audit fee/ tax fee calculated on
contingent fees basis – ANY
audit client
Threat
Potential SELF -INTEREST
threat
IN THAT the firm may be
under pressure to reduce the
work to minimise cost in order
not to make losses
Also a potential THREAT TO
PROFESSIONAL COMPETENCE
AND DUE CARE
IN THAT quality of the work
may be compromised due to
low fee quoted
SELF INTEREST THREAT
IN THAT the auditor may not
qualify the audit opinion
(should the need arise) in
order to continue to be
reappointed and revenue
stream of the firm not
disrupted
Potential INTIMIDATION
threat
IN THAT the auditor may be
concern on losing the client
Potential SELF INTEREST
threat
Rule / Safeguard
In order to ensure that future
relationship not affected, it is
important that client is not
misled by the fees that might be
charged in the future
Firm should maintain records to
show that appropriate time and
qualified staff were assigned and
all applicable ISAs and QC
procedures are complied with to
ensure the audit has been
carried out competently
PIE=Public Interest Entity
NON PIE
Reduce the dependency on the
client ( take more clients)
PIE
Reduce the dependency on the
client ( take more clients)
IF FEE > 15% of firm total fee for
two consecutive years to inform
TCWG
Slightly >15%
Agree with one of the safeguard
with TCWG
- PRE-ISSUANCE-
REVIEW (bf 2nd year
opinion)
- POST ISSUANCE
REVIEW (bf 3rd year
opinion)
Significantly >15%
Pre-issuance review
For the review – need to be done
by external reviewer ( not a
member of the firm)
Calculation of fees based on
contingent fees basis is out
rightly PROHIBITATED
10% X PBT
Significant fee relating to ANY
client long overdue
• Long outstanding fees
are viewed as
equivalent to loan to
the client , especially
when audit fees
remain unpaid for a
long time
Loan & Guarantees
Giving loans to ANY Client
Giving guarantee to Bank for
any client’s loan
Audit firm receive loan from
any client
Audit team member
ATM receive loan from any
client
Financial Interests
Financial Interest in ANY client
IN THAT the auditor may
ignore audit adjustment that
reduce the profits
Potential SELF INTEREST
threat
IN THAT the auditor may not
qualify the audit report in
order to receive the previous
yea and the current year fees
paid
Potential Self Interest threat
IN THAT the auditor is unlikely
to qualify the audit opinion in
order for the loan to
recovered
Potential Self Interest threat
IN THAT the auditor is unlikely
to press client to put through
any adjustment that may
cause debt covenants to be
violated in case the bank
pursues the audit firm to
recovery of the bank loan
Potential Self Interest THREAT
IN THAT auditor is unlikely to
qualify the audit opinion in
fear that client will demand
immediate repayment
Potential SELF INTEREST
threat
IN THAT the ATM is unlikely to
press the client on accounting
issues for fear that client will
demand immediate
repayment of the loan given
to him
If Audit firm is holding share:
The basis for the calculation of
the audit fee should be agreed
with the audit client each year
before significant audit work is
undertaken
- Delay the
commencement of the
current year audit till
fees are settled
- Discuss with
management of any
instalment arrangement
- Required
payment for overdue fee
before audit report is
issued
PROHIBITED:
Loan and Guarantees are
material to the audit firm and
the client
Material in nature:
The client company is in
desperate need for the
additional finance
PROHIBITED:
- If client is not a
bank or financial
institution and loan is
material to the audit firm
- If the client is a
bank or financial
institution and the loan is
not in normal terms
Exceptions
-bank or financial institution
-normal term or rate
PROHIBITED :
- Audit firm

Inadvertent Violation
- Not violation
- Dispose of the
share immediately
Relationships
Business Relationship
The firm, ATM , or immediate
family member have close
business relationship
Family Relationship
Between the client and ATM
Long Association
Potential Self Interest threat
IN THAT the audit firm unlikely
to qualify the audit opinion in
order that the share value will Shares in client currently being
not fall
The partner , ATM or their
immediate family or close
family potential SI threat
IN THAT the audit team
member unlikely to insist on
any acc adjustments that
might cause profits to fall
Potential Self – Interest threat
IN THAT that auditor is
unlikely to qualify the audit
opinion fear of ruining the
business relationship
Potential Self – Interest threat
IN THAT that ATM unlikely
press client on accounting
adjustment in fear of ruining
the business relationship
1. Potential SI threat,
unlikely to expose the
wrongdoings of that
relatives / friends for
fear of losing their
affections
2. Potential Familiarity
threat, likely to be
sympathetic or may
accept their
explanation without
sufficient scepticism
Potential Familiarity threat
- ALL Partners and
their immediate family
audited - PROHIBITED
- ATM and their
immediate family
ATM knows that their close
family member has financial
interest in an audit client
Safeguards:
- Inform audit
engagement partner
- In the meantime,
remove the staff from
the team
- Inform the Audit
Committee
- Close family
member to dispose off
shares ASAP.
OUTRIGHTLY PROHIBITED IF :
Financial interest is material and
the business relationship is
Significant to the firm, the ATM ,
the client and its management
If immediate family member
- The ATM should
be removed
If client staff is involved in
Financial / Accounting is a close
family member
- ATM removed or
- If not re-
structure responsibilities
so that he does deal with
the family member
NON PIE

( ATM auditing the same client
for a number of years
Ex -client join the firm for
employment
Appointment with client
ATM is planning to join client
as director or employment
significant influence in
preparation of client F/S
ATM already join the client
IN THAT sympathetic to the
friends or may accept their
explanation without sufficient
scepticism
Potential Self – Review threat
IN THAT, the former client
staff is unlikely to be critical
when auditing own work
Potential Familiarity threat
IN THAT the former client staff
sympathetic to the friends or
may accept their explanation
without sufficient scepticism
Potential SELF INTEREST,
IN THAT the ATM is unlikely
press the client on accounting
issues in fear of losing the
chances to join the company
Potential FAMILIARITY
THREAT
IN THAT the audit staff
remaining on team are
unlikely to exercise prof
scepticism
No requirement for rotation
PIE
- Key audit
partner rotate after 7
year (calculated based on
cumulative basis and
need not be consecutive
)
- Cooling off
period 2 years
ATM – rotated every 2-3years
OUTRIGHTLY PROHIBITED for
two years after resignation from
former employer
PIE
1. KAP OUTRIGHTLY
PROHIBITED to join the
entity after the next 12
months F/S are
published
Other ATM
- Notify the firm
when entering the
employment
negotiations with client
- ATM to be
immediately removed
from the team
- Modify the audit
plan
- Remove his
friends from the audit
team
Partner appointed as board
member
Partner appointed as company
secretary
Gifts and Hospitality
- Gift
- Hospitality
- Entertainment
- Political or
Charitable donations
- Employment
with other commercial
- Preferential
rights
Firm , ATM, Immediate family
purchase goods & services
from client
Not huge magnitude
Huge magnitude
Potential SI, partner may not
raise difficult accounting
/audit issues with the Board ,
in fear of not being
recommended for
reappointment as auditor
Potential SI – Partner may not
raise difficult accounting
/audit issues with the Board,
in fear of not being
recommended for
reappointment as auditor
If it’s a promise
Potential SI threat,
ATM unlikely to do anything
contrary to clients wishes in
order to continue to be able
to receive the gift or
hospitality
After receiving
Potential FAMILIARITY, ATM
sympathetic to client staff
interest as a way of returning
the favour received
Outrightly PROHIBITED :
Auditor only to attend board
meeting only to raise audit issues
with management /TCWG
EP may not be part of any
management decision made at
the meeting
Outrightly PROHIBITED:
Only allowed if the secretarial
work related to routine or
administrative in nature
Shall not accept unless is trivial
and inconsequential
Gift or hospitality – improperly
influence behaviour even if the
amount is trivial or
inconsequential is PROHIBITED
Reject the gift – depend on the
nature, value and intent behind
the offer.
Receipt of gift not interfere with
the timing of audit procedure
Normal social courtesies – lunch
after meeting – Allowed
Received same discount as client
staff is allowed provided value of
discount is not excessive
Allowed if :
Is the transaction is normal
course of business
At arm’s length ( market rate)

Pressure from client to reduce
extend of work in order to
reduce the fee
Threat of replacement ( over
disagreement with applicable
accounting principles
Threat of legal action
non audit services
NAS – Accounting
Providing technical assistance
during the audit
Prepare accounting records (
payroll, item in the financial
statement)
NAS – Tax
Filling up tax returns
Potential Self Interest, the
firm is unlikely to qualify the
opinion the client for fear of
losing supplier
Potential Intimidation Threat,
the firm will be under
pressure to cut corners and
not raise the issues –
comprise the objectivity
Potential Intimidation Threat,
THE FIRM may raise the issue
of difficult accounting issue
with Board – fear of not being
reappointed
Potential Intimidation Threat,
THE FIRM may raise the issue
of difficult accounting issue
with Board – fear of legal
action
Services (eg application of
accounting std, resolving
accounting reconciliation
problems) – NORMAL,
considered part of audit
process
ACCA – Allowed – promoting
fair presentation of Financial
Statement
Create SELF REVIEW ,
subsequently team will be
critical when auditing these
item
No threat – subject to review
by the tax authorities
Reduce the magnitude of the
transactions
Remove the individual from the
audit team
Don’t give in to client
- Communicate
pressure from client to
AC
Don’t give in to client
Communicate pressure from
client to AC
Best is to resign since the client
& firm management are
adversarial positions
X SAFEGUARD
Non – PIE
May provide which are routine in
nature ( no professional
judgement required) . But must
me non -ATM
PIE
IT IS PROHIBITED
Unless,
Routine in nature, Services are
for immaterial item to the FS and
performed by NON-ATM
Calculating current tax and
deferred tax for the purpose of
preparing accounting entries
Tax planning & other tax
advisory
Assistance in resolution of tax
disputes ( seen to provide
advisory role)
NAS – VALUATION
Valuation – especially if there
is merger and acquisition
Valuation – material to FS (>
1% of TA)
Valuation – especially if there
is merger and acquisition
Valuation – NOT material to FS
(<1% of TA)
NAS – OTHERS
Temporary staff assignments (
lending staff by firm to client )
Potential Self Review – may NON PIE
not be critical in the audit Threat level
- Complexity of
the law
- Degree of
judgement
- The level
expertise required
- Materiality of
the amount to the F/S
PIE
PROHIBITED if material
Non material items – can only be
by non – ATM
Potential advocacy threat - ALLOWED – BUT TO BE
promoting the client interest – PERFORMED BY NON-ATM
objectivity will be impaired
Self review threat - may not
be critical in the audit
Advocacy - promoting the Have a tax professional , who are
client interest – objectivity will not involved in proving the ta
be impaired services and advise to audit team
Potential self review –
because of own advise , not so
critical subsequent auditing
matters.
Self-review - may not be PROHIBITED
critical in the audit
Self-review - may not be Should be performed by non-
critical in the audit ATM
Self-review - x critical because Allowed if
review own work - Period is short
term
Familiarity threat – will be - Not
sympathetic , may accept management
their explanation responsibilities

Recruitment services
Acting as advocate on behalf of
client – litigation or resolving
dispute
NAS – Internal Audit
NAS- IT System
Design & implement IT System
(Design ICs)
Self-interest threat – unlikely
highlight the shortcoming
Potential SELF REVIEW – IN
THAT the audit team may use
the result of IA service (
carried out by the audit firm
Potential SELF REVIEW – IN
THAT the audit team may be
less sceptical in assessing the
effectiveness IC
Self -interest – unlikely to
adopt substantive procedure ,
may not highlight deficiencies
in the firm’s work
- Client is in
charge for direction and
supervision
- Cannot be a
senior staff
If the staff seconded for long
period of time , then included in
audit team – PROHIBITED
Prohibited – especially for
DIRECTOR , MEMBER OF SENIOR
MANANGEMENT , THOSE
POSITION WHICH HAS
SIGNIFICANT INFLUENCE IN THE
PREPARATION OF fs
Prohibited
If material
If not material - use NON -ATM
NON PIE
IC over the financial or non
financial controls
- Allowed to
provide ASSISTING
CLIENT IA department
- Service is
provided by non ATM
PIE
ICs over financial controls
Prohibited
ICs over non financial controls
- Allowed to
provide ASSISTING
CLIENT IA department
- Service is
provided by non ATM
NON PIE
IT system for financial or non
financial
- Allowed to
provided client is
involved in the decision
making
- Service is
provided by non ATM
PIE
IT System financial
 Potential management Prohibited
decision making threat
IT System non financial controls
- Allowed to
provided client is
involved in the decision
making
- Service is
provided by non ATM

Corporate Finance Services Self review – less critical Non ATM

Financing Proper review who is not
Investment Advocacy – promoting the involved audit
Strategies client interest
Structuring
Prohibited
( underwriting audit client shares
, promoting with client shares )